Weak domestic demand rather than U.S. tariffs is the main reason China is dumping surplus products on European markets at rock-bottom prices at the expense of domestic producers, a European Central Bank study argued on Tuesday.
Pressure has been growing on the European Union to act on surging imports from China as U.S. tariffs force Beijing to find new markets for products it now struggles to sell.
“Escalating trade tensions between the United States and China might result in a further diversion of Chinese exports to Europe,” the ECB argued in an Economic Bulletin article.
“However, the rise in China’s exports to the EU predates the latest tensions and coincides instead with the onset of weakness in domestic demand in China,” the ECB added.
2021 Trend
The ECB argues that the start of the current trend can be dated back to 2021, when a housing downturn in China depressed domestic demand and started weighing on housing investment, an import-sensitive sector.
Meanwhile, state-led manufacturing investment, aimed at stabilising growth, created excess capacity and led firms into price wars, prompting them to redirect sales toward foreign markets, the ECB argued.
“To expand abroad, firms must gain competitiveness,” the ECB argued. “They typically do so by reducing short-run marginal costs and prices, or by accepting narrower profit margins, and in some cases even losses.”
Meanwhile, a host of factors in China, like weak consumer demand, trade policies, and a strategic focus on the domestic manufacture of key products, keep curbing import demand and point to a lasting shift in China’s import behaviour, leaving the trade gap on a widening path.
Trump-Xi Meeting
Late last month, U.S. President Donald Trump said he had agreed to cut tariffs on Chinese goods to 47% following what he called an “amazing” meeting with President Xi Jinping, in return for China resuming purchases of U.S. soybeans, continuing rare earth exports, and curbing fentanyl trafficking.
Trump repeatedly talked up the prospect of reaching an agreement with Xi since U.S. negotiators said they had agreed on a framework with China that will avoid 100% U.S. tariffs on Chinese goods and achieve a deferral of China’s export curbs on rare earths, a sector it dominates.
But with both countries increasingly willing to play hardball over areas of economic and geopolitical competition, many questions remain about how long any trade detente may last.
(with inputs from Reuters)
